What Is Usage-Based Car Insurance?

How Does Usage-Based Insurance Work?

Usage-based car insurance calculates your insurance premium based on how, when and how much you drive rather than only on traditional factors like your age, location, driving history and credit-based insurance score.

To participate, your real-time driving information is shared with the insurance company in one of a few ways:

• A mobile app on your smartphone
• A plug-in device installed on your vehicle
• Built-in technology available in some newer cars

Your driving data is collected over weeks or months using telematics—a technology that collects and analyzes driving behaviors using GPS, motion sensors and wireless communication. Insurers then use this information to adjust your insurance premium.

Learn more: Factors That Affect Your Car Insurance Costs

Types of Usage-Based Car Insurance

There are two primary types of UBI: pay-as-you-drive and pay-how-you-drive. Availability of each type of insurance varies by insurer and state, and some insurers offer both options.

Pay-As-You-Drive

With pay-as-you-drive insurance, your premium is based on the number of miles you drive. You can pay less by driving fewer miles. Most insurers charge a base rate plus a per-mile fee.

This option is a good fit for low-mileage drivers, remote workers or households with a second vehicle that's used only occasionally. If your mileage increases, your insurance costs can rise quickly.

Example: You have a pay-per-mile policy with a flat monthly rate of $25 and a per-mile rate of 6 cents. You average about 500 miles per month. This would make your typical pay-per-mile insurance payment $55 ($25 + (0.06 x 500) = $55). You go on a trip that causes you to drive 1,500 miles one month, making your premium for that month $115 ($25 + (0.06 x 1,500) = $115).

Pay-How-You-Drive

Pay-how-you-drive insurance focuses on how safe of a driver you are. Insurers consider driving behavior and consistency, looking for patterns that may indicate risk, including:

• Total miles driven: Since spending more time on the road increases accident risk, lower mileage can make you eligible for discounts.
• Speed and speeding frequency: Regularly driving over the speed limit is riskier and can lead to increased insurance rates.
• Hard braking or rapid acceleration: These driving habits are often related to tailgating, distracted driving or impatient driving.
• Time of day you drive: Late night or early morning driving is related to lower visibility and fatigue. Driving mostly during the day may lead to lower insurance rates.
• Phone use while driving: Habits like texting, scrolling or taking handheld calls can influence your driving score and limit savings.

Safer habits can lead to discounts over time, while risky driving behavior may reduce or eliminate savings.

Learn more: How Does Mileage Affect Car Insurance?

Usage-Based Car Insurance Pros and Cons

Like any insurance product, UBI comes with trade-offs. It's worth weighing these pros and cons before enrolling.

Learn more: How to Save on Car Insurance

Is Usage-Based Insurance Worth It?

Not all drivers will benefit from usage-based insurance. Since it prices your premium based partly on specific driving behaviors, it tends to reward lower-risk drivers. It may be worth considering if:

• You have a teen driver who can demonstrate safe habits. Teen drivers typically have higher insurance premiums because they're statistically more likely to be involved in accidents. A UBI can give teen drivers an opportunity to prove their responsibility.
• You have poor or limited credit history, leading to higher traditional premiums. In states where insurers use credit-based insurance scores, people with thin or damaged credit may be quoted higher rates even if they're careful drivers. UBI can potentially reduce the impact of credit-related pricing by focusing more on actual driving behavior.
• You don't drive much, have a short commute or work remotely. Traditional policies often price based on average annual mileage, which means you could be overpaying if your car spends more of its time parked. Remote workers, retirees and college students are examples of drivers who may benefit from UBI.
• You're a safe and consistent driver. If you tend to avoid hard braking, rapid acceleration and speeding, you could receive bigger discounts from UBI since it measures your real driving behavior.

On the other hand, UBI may not be the best fit for you if:

• You work a night shift or drive late at night. Nighttime driving is considered a higher risk.
• You have a long daily commute. More time on the road each weekday presents more opportunities for sudden braking and congestion-related stops. Additionally, your long commute may not make pay-per-mile insurance feasible.
• You take frequent road trips or have high annual mileage. If you spend your weekends on scenic highway drives or open-road cruises, you may accumulate a high number of miles and lower your access to discounts.
• You modify or tune your car for performance. Even if you drive responsibly most of the time, quick takeoffs, higher RPM driving and cornering can reduce safety scores.
• You drive for delivery or rideshare. The volume, delivery window expectations and stop-and-go nature of your routes can increase your number of risky events. And, you may need specialized coverage to protect you if you should get in an accident while on duty.
• You prefer not to share your location or driving data. If you're concerned about privacy, a traditional policy may feel more comfortable.

How to Get Usage-Based Car Insurance

Signing up for UBI is typically straightforward and can be completed online, through a mobile app or by calling your insurer.

1. Check with your current insurer. Determine whether your current insurer offers UBI. If they do, and you're happy with their service, it's often easier to convert your policy than to find a new insurance company.
2. Review eligibility requirements and terms. Call customer service or login to your account through the insurer's app or online to determine whether you're eligible and explore the monitoring period and discount process.
3. Download the app or install the device. Choose which data collection method you prefer. Then, follow the setup instructions carefully to ensure your data is properly collected.
4. Start driving. Depending on your provider, you may be able to view statistics about your driving including trips, hard braking, fast acceleration and times you used your phone.

If your current insurance company doesn't offer UBI, this may be a good time to shop around for new car insurance. You can take this opportunity to adjust your coverage limits or get better service than you're experiencing now, along with benefitting from signing up for UBI.

Learn more: Ways to Find the Most Affordable Insurance Online

The Bottom Line

Usage-based car insurance shifts your insurance cost from traditional averages to your actual driving habits. For safe drivers, this can lead to significant savings on your insurance costs. Because of privacy concerns and varying driving habits, UBI isn't for everyone. Fortunately, many insurers offer other discounts that can help you save.

If you're in the market for a new auto insurance policy—even one that offers UBI—check out Experian's auto insurance comparison tool. You can view apples-to-apples coverage from top insurers, so you'll be able to clearly see whether you're getting the best deal.